To summarize: major investment bank Bear Stearns collapsed, with the feds bailing out its creditors but not its investors. Oil hit $112 a barrel, an all-time high. The job market has contracted with every report, the housing market is glutted, and, oh yeah, everyone’s lost a bundle in the market. Big-name financial stocks like Citibank have given up a third of their value in three months. Credit is weirdly cheap but tight, and President Bush recently huddled with Fed chairman Ben Bernanke, Treasury Secretary Henry Paulson and other financial advisers, trying to decide what to do about the current crisis in confidence.
So perhaps one more deep, calming breath is in order before you start taking action, along with some repetitions of a “this too shall pass” mantra. Feeling better? Now take these steps to make some money while there’s blood in the street. And protect yourself so that it doesn’t turn out to be your blood.
Leave your retirement account alone. Chances are you’re already in diversified mutual funds that will moderate your losses. “Don’t sell into this market,” says Jane King of Fairfield Financial Advisors in Wellesley, Mass. Rather, keep buying into the market by continuing your regular weekly and monthly contributions. You might even ramp them up a bit, especially if you’re a decade or more away from spending that money. Today’s share prices might not represent the nadir, but they’re likely to look very good by 2018 or 2025.
Jigger your other investments. If you own stocks and bonds outside of your tax-deferred retirement accounts, it’s a good time to sell some shares on bad days and lock in losses. If you don’t want to be out of the market, reinvest the money in other stocks, bonds and funds. Don’t buy the same shares back for at least 31 days, to avoid running afoul of tax rules. What about the bank stocks? It’s too late to sell early, and some might recover very quickly once all of Washington’s confidence-building measures take hold. Investment banks like Bear Stearns remain risky, says Morningstar analyst Matt Warren, but it’s a good time to buy smaller, regional banks. They’re supported by deposits that aren’t going away, and they have access to all of the Fed’s emergency lending if they need it.
Pay down costly debts. Get very aggressive about paying down high-cost debt. That includes credit cards, variable home-equity lines of credit and most car loans. “That’s one of the best investments you can make,” says Atlanta-based financial adviser David Hultstrom. Look at it this way: paying off a 7 percent loan is a sure-fire, tax-free 7 percent return. That’s impossible to beat in this market.
Stretch out cheap debts. Don’t make extra payments on your mortgage if it’s a fixed-rate loan under 6 percent. That’s a handy loan to have; instead, use your extra cash to build up that emergency fund.
Stash your cash safely. In tough times like this, that emergency cash should go into an FDIC-backed bank money market account. For yield, you can look to the online banks like zionsbank.com and ingdirect.com. Or simply keep it at your neighborhood bank.
Avoid the urge to get more adventuresome with your investments as a way to make back losses. Foreign stocks have boomed, but they’re still moving down with the U.S. markets. And now that the dollar is at an all-time low against the euro and sinking in Asia, too, you’re paying a lot for those foreign shares. The time-tested safe haven during market turmoil, gold, has already come close to doubling in two years. It costs money to own, trade and store, and gold earnings are usually taxed more heavily than earnings on stocks and bonds. All the hype about making money by buying foreclosures, derivatives, tax liens, commodity futures and options? Eh, definitely not as easy as it sounds, and best not tried at home.
Hunt for bargains. If you thought you were a couple of years away from buying a house, you might start looking now, says Hultstrom, because loans are cheap and it’s a buyers market. Study stocks to see whether there are some good companies getting beaten down along with the troubled ones.
Put that 401(k) statement away. Just because you can watch your retirement fund in real time doesn’t mean you should. Individual investors usually do themselves more harm than good by reacting to each hour’s economic news. Just do what you’re supposed to in a recession: tighten the belt, pay down the bills, salt away cash and keep investing for the next upturn of the economic cycle. And don’t waste time worrying. Leave that up to the Bernankes and Paulsons. It’s what you pay them for.
